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Home / IAS Preparation / Minimum Alternative Tax (Mat)

Minimum Alternate Tax - Detailed Notes for UPSC Exam!

Last Updated on Dec 14, 2023
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MAT is the acronym for Minimum Alternate Tax. The implementation of MAT aims to bring "zero tax companies" into the tax net despite the fact that they have generated big book profits and paid out sizable dividends. This is due to the numerous tax deductions and incentives provided by the Income-tax Law. The required alternative tax rate for AY 2022–2023 is 15%.

In this article, we will learn about Minimum Alternative Tax. The topic is important from the subject of government policies and intervention under GS Paper II and planning, growth, and development under GS Paper III from the UPSC Civil Services Exam.

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What is Minimum Alternate Tax? 

Minimum Alternate Tax (MAT) is a provision in India's Income Tax Act. It ensures that companies with substantial book profits pay a minimum amount of income tax. This holds even if they have reduced their tax liability through various deductions and exemptions.

Calculating MAT 

  • In situations where the taxable amount determined through the provisions of the Income Tax is less than 15% (including the relevant surcharge and cess) of the book profit as per The Companies Act 2013. The Corporate Tax Rate for India is AY 2022 is 25%
  • For example, a company with a recorded profit of Rs. 100 crore has to pay a minimum tax of Rs 15 Crore. (based on a 15% MAT rate)
  • If the normal tax liability after deductions is 10 Crore (which is less than MAT), the company must pay 5 crores as MAT and use the MAT credit of Rs 5 crore towards future payments.

Read about Non-Tax Revenue from here!

Purpose of Levying MAT

The purpose of Minimum Alternate Tax (MAT) is to prevent companies from reducing their tax liability to zero or a very low level through various deductions and exemptions. This ensures that companies with substantial book profits make a minimum contribution to the government's revenue. MAT is also intended to discourage companies from engaging in aggressive tax planning schemes that may artificially reduce their taxable income.

Read about the Direct Tax Code from here!

Basic Provision of MAT
  • The amount of MAT owed is determined by calculating either 15% of the book profit (as recorded in the profit and loss statement) or the standard corporate tax rates higher. Book Profit for MAT is calculated as per Schedule III of the Companies Act 2013. The corporate Tax Rate for AY 2022 is 25% for domestic companies.
  • The tax rate for Minimum Alternative Tax is usually lower than the standard corporate income tax rate. The minimum alternative tax rate for AY 2022-23 is 15%.
  • The provision of MAT applies to all companies in India, regardless of their domestic or foreign status. The scope of MAT was later expanded to include non-corporate entities. As a result, it serves as a crucial mechanism for preventing tax avoidance.
  • The regular tax obligation of a company is determined according to the standard provisions of the Income Tax law, by which the taxable amount is calculated using the applicable law in the country.

Read about Taxation in India from here!

Applicability of MAT 
  • As per section 115JB, a company is obliged to pay MAT if the tax calculated on its total income, as per the rules of the Income Tax Act for any year, falls below 15% of its book profits, which includes the surcharge and cess. The surcharge for AY 2022-23 for companies is 12% of the amount of income tax where income exceeds 1 crore. 
  • MAT can provide benefits to both business and public sectors. 

Read about GST from here!

Non Applicability of MAT 
  • MAT does not apply to any income earned from life insurance companies as per Section 115JB(SA)
  • New domestic incorporations on or after October 1, 2019, are exempted from MAT.
  • Shipping income subject to tonnage taxation is not subject to MAT according to Section 115 V-Q
  • Foreign assesses are exempt from MAT if they fall under the following categories-
    • Residents of a nation or designated territory with a treaty agreement with India do not have a permanent address in India as per the treaty agreement’s requirements.
    • Residents of a nation with no agreements with India and not required to register under any law relating to companies.
  • Profits from firms described in Section 44AB, 44BB, 44BBA, or 44BBBA are considered part of the total income for foreign companies. 

Read about Value Added Tax from here!

What is MAT Credit?

MAT Credit is also known as Minimum Alternate Tax Credit. It is the difference between the Minimum Alternate Tax (MAT) paid by a company and its regular income tax liability. This credit can be carried forward and used to offset the company's regular income tax liability in future years.

Calculation of MAT Credit

MAT Credit is calculated as follows:

MAT Credit = MAT Paid - Regular Income Tax Liability

Read about India’s Gross Fiscal Deficit from here!

Difference between Minimum Alternative Tax and Alternative Minimum Tax

Minimum Alternative Tax and Alternative Minimum Tax aim to ensure that taxpayers pay a minimum amount of tax, no matter the tax benefits they enjoy. However, their applicability is different. 

Basis

Minimum Alternative Tax

Alternative Minimum Tax

Application

Minimum Alternative Tax (MAT) applies to companies only

Alternative Minimum Tax applies to individuals, Hindu Undivided Families (HUFs) and firms (other than companies).

Rate

The tax rate for MAT is 15% of book profits or taxable amount as per the Income Tax Act, whichever is higher. The normal Tax Liability of a domestic company is 30%, plus surcharge and cess. The calculation of book profit for MAT is as per provisions of the Companies Act 2013. The surcharge for AY 2022-2023 for companies is 12% on the amount of income tax where net income is more than 1 crore.

The tax rate for AMT is 18.5% of adjusted total income (15% in the case of a cooperative society.)

Special Provision

A non-corporate assessee that operates as a unit within an International Financial Service Centre and earns its income solely in convertible foreign currency is subject to a 9% Minimum Alternative Tax, which may also include additional surcharge and cess as applicable.

None as of now

Read about Gross Development Product from here!

Future of MAT in India

The government has been under pressure and receiving suggestions to make amendments to MAT. This is to make it more inclusive and flexible. To address the disputes related to MAT payment, the Indian government has formed a special committee. Currently, the committee's focus is on resolving MAT demands from foreign institutional investors who have received notices for MAT payments in recent months. However, the government is still working on making MAT payment more comprehensive and regulated.

Conclusion

A minimum Alternative Tax was a needed step to check on tax evasion by companies who take benefits of treaties and deductions and refrain from any tax liability despite earning stable and good profits.

India is a developing nation that relies on borrowing and taxation to fund its developmental programs. In such a situation, any kind of evasion is detrimental to the welfare of the poor and thus, Minimum Alternative Tax is a good initiative. 

We hope the article helps you prepare notes for Minimum Alternative Tax. Testbook provides a set of comprehensive notes for different competitive exams. Testbook is always on the top of the list because of its best quality assured products like live tests, mocks, Content pages, GK and current affairs videos, and much more. To study more topics for UPSC, download the Testbook App now. For further information and an explanation of the topic, visit UPSC Civil Services Coaching here!

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Minimum Alternative Tax FAQs

 Minimum Alternative Tax (MAT) is a tax imposed by the Indian government on companies that have a taxable income below the minimum tax liability as defined by the Income Tax Act. The purpose is to ensure that companies, including those that may have used various tax incentives, pay a minimum tax

 Minimum Alternative Tax (MAT) only applies to company taxpayers, while the provisions of Alternative Minimum Tax (AMT) are applied to non-company taxpayers in a modified manner. In other words, MAT applies to companies while AMT applies to individuals who are not a company.

A company must pay a Minimum Alternative Tax (MAT) equal to 15% of the book profit  (including surcharge and Health and Education cess as applicable) as this is the minimum alternative tax rate for AY 2022-23. This is applicable if the company's normal tax liability is less than 15% of its book profit. The detailed procedure for the calculation of book profit for MAT is mentioned on the government website and is as per the provisions of the relevant act.

Consider the example of ABC Limited. Its tax liability as per the provision of the Income Tax Act is 2,52.000. The book profit of the company is assumed to be 18,40,000. Here as per Minimum Alternative Tax provisions, 15% of 18,40,000 is 2,76,000. (15% being the minimum alternative tax rate for AY 2022-23)  As the tax liability as per Income Tax Provisions is less than MAT. Thus tax liability of ABC Limited will be 2,76,000 (plus cess and surcharge as applicable)

Alternative Minimum Tax (AMT) is a tax for individuals (not companies) which makes sure that an individual pays a minimum tax, regardless of any tax exemption or incentives they may have used. The rate of AMT is 18.5% of the adjusted total income of an individual. Surcharge and cess will also be charged, if applicable. 
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